Nicola Willis’ mini-Budget draws spending line in the sand

Wednesday, 20 December 2023

ANALYSIS: Nicola Willis’ first mini-Budget is a political statement of intent. It is designed to show that in a few short weeks the Government has made - and Cabinet has committed to - decisions that will save $7.47 billion over the next four years.

There is little new in it, in what has been broadly signalled and promised in coalition agreements. Despite the branding, it isn’t so much a mini-Budget but a very early confirmation of decisions to pare back government spending.

All the areas are basically as expected: ending the climate emergency response fund, getting rid of commercial building depreciation changes, not going ahead with Labour’s 20 hours of free childcare for under-2s and ending a bunch of programmes from Let’s Get Wellington Moving to Resource Management Act reform. There are others.

The political takeout Willis will want to get across is this: the Government found $7.5 billion in just three weeks and by the time the May Budget rolls around they should be able to find quite a bit more.

This figure will be about half the amount needed for the Government’s tax cut package. That package could well look a bit different to the plan which National campaigned on - but on the basis that no-one will get tax cuts worth less than National’s election promises. The Government has committed to “consider the concepts of ACT’s income tax policy as a pathway to deliver National’s promised tax relief”.

Despite the light and heat of the election campaigning, decisions must now be measured against what the coalition government - made up of three parties - committed to.

The Half Year Economic and Fiscal Update (HYEFU) - which was released at the same time as the mini Budget - is usually released with a Budget Policy Statement, but not this year. This is a fiscal strategy of the Government for the coming year and usually includes the forecast envelope for new government spending over the coming four years - known as the operating allowance.

This time, the Budget Policy Statement will not be released until March 2024. So there is not yet a sense of just how much Willis will pare back new spending each year. In any case, any increases over the next couple of years will probably be gobbled up by keeping health and education spending in line with inflation - a promise made by Christopher Luxon - as well as folding in savings in other areas. Already two-thirds of the expected new money next May has been pre-committed to other things.

The economic outlook is broadly as expected. The forecasts for the HYEFU were closed before the new government was formed and given that GDP growth figures released by Stats NZ last week were much weaker than expected and included in these forecasts, a bleaker outlook is inevitable.

The growth and fiscal outlooks is basically a bit worse than what was forecast before the election - debt will peak a bit higher than expected, a surplus might appear in 2026-27 but it will be razor thin ($140 million). The tax take will be down. Times will be tougher. Inflation is predicted to be back in the to 1-3% band by the end of next year.

And crucially, economic growth over the next couple of years will be entirely driven by inwards migration. This is important because it means while the headline growth figures might be OK, on a per-person basis New Zealanders are going backwards. Willis was very keen to talk about per-capita GDP growth in opposition, it will be interesting to see if her enthusiasm for this measure continues.

The mini-Budget is an overtly political document that seeks to cast Labour as the irresponsible spendthrift which lost control of the books. Willis, clearly not burdened by caution with hyperbole, claims to be starting an “economic clean-up” necessitated by Labour’s “fiscal wreckage”. It basically confirms a bunch of coalition or election promises made and gives what Nicola Willis told The Post on Tuesday was a “down-payment” on future tax relief.

Her first presentation in front of journalists and analysts was typical Willis - well-organised, to a point, a mix of short term political imperative in a long-term economic framework of restraint - while also having a keen eye to the political objectives of the Government.

There will be a $9 billion deficit this year followed by a $6 billion deficit the next year.

Overall, the mini-Budget is about capturing the temper of the times. The Reserve Bank’s sharp increase in interest rates, which are flowing through to households - mean discretionary consumer spend is in the middle of a pincer of higher inflation and higher interest rates.

Consumer and business confidence is low and the lower-than-expected tax take reflects spending restraint in the economy. This means that unemployment is expected to peak at 5.2%. Regardless of where that number ends up, the growth figures released last week give an abstract glimpse into what will be a very real-world squeeze coming for high streets up and down the country over the coming months.

Willis said that there is an “urgent need for a culture of responsible spending across government”. She highlighted issues such as the GeoNet monitoring services where money runs out as the sort of key areas not properly funded into the future. She claims that time-limited funding for line items over $50 million would mean an extra $7.2 billion in spending if continued and properly funded over the next four years.

She also called it the “initial phase of fiscal repair”. The May Budget is the clear working target. And Willis confirmed that while ficsal restraint is in, next year’s budget will have more of a focus on supply-side changes and micro economic (company and household level) reform. Basically making legal and regulatory changes that attempt to make it cheaper and easier to run a business or a household.

Overall, Nicola Willis’ first mini-Budget is about demonstrating intent, decisiveness and showing New Zealanders that government is doing its bit in these straitened times.

Plenty to talk about over summer BBQs.